Strategic Mindset: At Top Gun Options we're market neutral but have identified a potential target that is making headway in this interesting market.
Target: Amazon (NASDAQ:AMZN) currently trading at $186.38
Commit Criteria: With the release of Apple's (NASDAQ:AAPL) "new iPad" still being digested by the market and consumers and a recent legal dust up between Apple and Amazon (follow this link to read more), the Top Gun Options Trading Team has identified a potential bullish trade on AMZN. We've been bullish on the stock for a couple months now because of its power over online media content and strong earnings, while a downgrade from Morgan Stanley (NYSE:MS) had caused a stock drop of over $5. As you can see on our virtual trade MONSTER platform, the giant retailer has found support at 170 in the past 3 months and more recent, the 175 level.
3 MONTH CHART:
Tactic: April Bull Put Spread (also known as a Credit or Vertical Spread)
- Sell to Open 15 April 175 PUTS
- Buy to open 15 April170 PUTS
- For a net credit of $1.08 per share
- Maximum risk = $5,880 (5% of Primary/Intermediate Model Portfolio)
- Maximum reward = $1,620
Theta (time decay) is working in our favor. The more time that goes buy the more premium we get to keep.
This is a high probability trade - we have a 74% probability of capturing the full credit in this trade. But like in combat and trading…nothing goes as planned.
Eject Level: At Top Gun Options we have strict risk management rules of engagement so we can live to fight another day if things go south on us. We would eject from this trade if we lost 50% of our credit, or .54. However we don't like ejecting right before we hit the ground. We keep a tight leash on our trades and would re-evaluate this trade if it hit 25% loss of credit received.
Profitability Target: The trade objective is to allow the spread to expire worthless (above $175) and collect the full credit, or close at .05 to play it very safe.
Threats to success: If the litigation speeds up (SOLD!) or if some other large market moving force (Israel attack on Iran) occurs we may see a pull back in the stock. But this is why we trade options - we're hedged if the world goes to hell in a hand basket.
Exit Tactic: Buy to close the 175s and sell to close the 170s.
Happy Hunting and Make Sure You Hedge!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.